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Gold price climbs on weak dollar; rate outlook caps gains

London (Sept 14) Gold edged higher on Friday, lifted by a weaker dollar, but gains were tempered by expectations of a U.S. rate hike later this month.

The dollar index slipped to a 1-1/2 month low on Friday after weaker-than-expected U.S. inflation data and a recovery in emerging markets. Spot gold was up 0.4 percent at $1,206.01 an ounce by 1000 GMT, having hit its highest since Aug. 28 at $1,212.65 on Thursday. It has risen 0.9 percent so far this week, on track for its first weekly gain in three.

U.S. gold futures were up 0.3 percent at $1,211.70 an ounce.

"We've seen quite a bit of weakness in the dollar which has supported gold, but we're not out of the woods yet," said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen.

"The fact that gains weren't stronger has still got to do with gold's focus on the Chinese renminbi, which remains a bit challenged, but also that the market is starting to look forward to the next U.S. rate hike."

Gold has shown a close correlation to the currency of China, the biggest gold consuming nation, analysts say.

Investors widely expect another 0.25 percentage point interest rate hike when the U.S. central bank meets on Sept. 25-26, and there is a strong chance of another increase in December. Higher rates make gold less attractive since it does not pay interest but costs money to store and insure.

The months-long trade tension between Washington and Beijing has prompted investors to buy the U.S. dollar in the belief that the United States has less to lose from the dispute.

However, the demand for the dollar eased this week on news that the White House had invited Chinese officials to restart trade talks. "The trade negotiation is a favour to the (gold) market with the dollar a little bit soft and some shorts being covered. There is also some physical buying in Shanghai, with premiums rising," said Peter Fung, head of dealing at Wing Fung Precious Metals in Hong Kong.

Gold prices have declined about 12 percent from a peak of $1,365.23 in April amid intensifying global trade tensions and under pressure from rising U.S. interest rates. This has driven investors towards record short positions in Comex gold and heavy liquidations in gold exchange-traded funds (ETF).

Holdings of SPDR Gold, the largest gold ETF, were down 0.4 percent on Thursday and 4.1 million ounces from a April peak.

Meanwhile, spot silver rose 0.4 percent to $14.22 per ounce, platinum gained 0.7 percent to $807.50 an ounce after touching a one-month high of $812.30 on Thursday, and palladium dipped 0.2 percent to $980.50 per ounce.